MTR's woes highlight weakness of UK rail franchise system

Losing your chief executive and facing a criminal investigation might harm most companies’ chances of winning a public tender. But even after that happened this week to MTR, the Hong Kong-based transport operator, the company still has a strong chance of winning the UK’s West Coast rail franchise.

MTR’s travails do not appear to have harmed it because its two competitors for the franchise have both also been hobbled by recent events. “This is embarrassing for MTR but not on a scale to derail their bid,” said one person close to the bidding process. “The Chinese have still got to be seen as the frontrunners.”

What the MTR news does is highlight a structural problem of the UK’s rail system: fewer companies are now bidding for franchises. Gerald Khoo, analyst at Liberum, said: “There is a growing ambivalence among the investor community about UK rail franchises, especially since it creates a lot of political flak and outsize uncertainty relative to the actual value these businesses do or could contribute.”

Fifteen years ago there were regularly four or five bidders for each franchise, but recent competitions have attracted only two or three, according to Department for Transport figures.

MTR is part of a bidding consortium with Guangshen Railway Company, a Chinese high-speed rail operator, for the West Coast mainline franchise, starting in 2019 and including high-speed rail services as part of the £56bn HS2 project from 2026.

HS2 will run from London to Birmingham in its first phase, and then to Leeds and Manchester.

MTR announced this week that its chief executive was retiring early after the Hong Kong government said it “did not have any faith” in the company’s handling of a local $12bn metro extension project. Hong Kong media had reported engineering problems at a station.

Daniel Chung, the director of Hong Kong’s highways department, said the government suspected “there may be criminality involved” and had referred the case to the police for investigation.

This compares with the woes facing Virgin and Stagecoach, which are two-thirds of the West Coast Partnership bidding consortium. In May, the government stripped them of the East Coast mainline franchise after Stagecoach lost about £260m on the franchise and breached a financial covenant.

And later that month the chief executive of FirstGroup, a partner in the First Trenitalia West Coast consortium, resigned after the company lost £327m before tax in 2017-18. At least two of its franchises are already in trouble, including South Western Railway, which it runs with MTR.

A second person familiar with the West Coast bidding process said MTR was helped by the fact that the field had been “so weak to start with”.

Ellie Harrison, a campaigner for the renationalisation of the rail network, said the franchise system “was an attempt to impose a market on a natural monopoly which is simply failing because there aren’t enough big companies to run rail lines successfully”.

“The more they try to find a company that can do that, the further afield they’re having to go,” she said.

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The Department for Transport had to make a success of this “flagship” competition to justify the whole system’s existence, the first person close to the process said. “Any major problems would probably be career ending for some in the DfT,” the person said. “Plus if they scrapped the competition I’d expect bidders to send the government the bill for their bid — which could be £10m each.”

Whitehall officials said that all bidders were being kept under regular review. If the department deems a company such as MTR unfit to hold a passport, their right to bid will be revoked.

MTR said in a statement that it had strengthened “monitoring and supervision” over the affected project in Hong Kong and that the problems were “unrelated to the corporation’s other business”.

Additional reporting by Ben Bland in Hong Kong and Laura Hughes in London